Oil prices fell $5 on Tuesday -- reversing direction after Monday's dramatic rally which sent the price of crude substantially higher in a single session.
If you watch Fast Money regularly you might remember that we told you this would likely happen on Monday’s show.
At the time Fast Money’s Joe Terranova revealed that the recent spike stemmed from a hedge fund that was forced into covering a short position. (In other words they essentially had to buy oil contracts no matter the price ahead of expirations.)
But the volume of contracts traded Monday suggested to Terranovoa that the spike would not last. And he was right.
It’s not the same as what happened earlier in the year when oil surged over $140. “During May and June investors were chasing the one thing that was working, and that one thing was energy,” he says.
Now that the specific catalyst (short covering) has been removed from the equation, how should you play oil?
“You ought to own oil," Terranova counsels. "The fundamental supply story is in tact. I expect oil to trade between $85 to $115. If it gets down $95 I’m a buyer and if it gets up to $110 I’d take some off the table. Often time on Fast Money Terranova will recommend playing the space with the United States Oil Fund .
And if you want a more complex trade you might also want to keep an eye on “reformulated gasoline inventories” which will be released Wednesday. “It seems like the industry is working off inventory,” Terranova says. If so, that could be bullish for the refiners.
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CNBC.com with wires